Major Issues in Pakistan Economy

Lecture 2: History of Pakistan’s Economy

Dr. Zeeshan Atiq

zatique@ uok.edu.pk

Institute of Business Administration, Karachi

Pakistan’s Historical Performance

Source: McCartney, Matthew. Pakistan-The political economy of

growth, stagnation and the state, 1951-2009. Routledge, 2011.
▶ The political regimes in Pakistan include,
▶ the period of chaotic democracy 1947–58,
▶ the military dictatorship of Ayub Khan 1958–68,
▶ the rise and fall of Bhutto 1971–77,
▶ the military dictatorship of Zia 1977–88,
▶ the return of democracy 1988–99, and
▶ the military dictatorship of Musharraf 1999–2008.
▶ restoration of democracy in Pakistan
Pakistan’s Historical Performance

Source: McCartney, Matthew. Pakistan-The political economy of

growth, stagnation and the state, 1951-2009. Routledge, 2011.
▶ The data reveal 5 episodes of growth and stagnation in
Pakistan since independence.
▶ The episode of growth between 1951/52–1958/59
▶ An episode of growth, 1960/61–1969/70
▶ An episode of stagnation, 1970/71–1991/92
▶ An episode of stagnation, 1992/93–2002/03
▶ An episode of growth, 2003/04–2008/09
Pakistan’s Historical Performance

Source: McCartney, Matthew. Pakistan-The political economy of

growth, stagnation and the state, 1951-2009. Routledge, 2011.
▶ The above Figure 3.1 includes two filters of the raw GDP
growth series: a 10-year centred moving average of the data
and the Hodrick-Prescott filter.
▶ Both of these filters are designed to extract underlying trends
from noisy data.
▶ First, there is a clear acceleration in output from 1950/51 to
the early-1960s.
▶ After that the (smoothed) growth rates fluctuate between
about 5% and 7% until the 1980s, when there is a marked
deceleration lasting until the mid-1990s.
Pakistan’s Historical Performance

Source: McCartney, Matthew. Pakistan-The political economy of

growth, stagnation and the state, 1951-2009. Routledge, 2011.
▶ At its trough in the 1990s, (smoothed) GDP growth slows to
the lowest level since 1950/51, at about 4%.
▶ Growth then recovers, though next peaking at a rate lower
than in the high-growth years.
The Challenges of Independence: 1947-1958

▶ Pakistan was a nation physically divided, its East Wing

(present-day Bangladesh) and West Wing separated by some
1,000 miles (1,600 km).
▶ Major issues included:
▶ Could it exist as two separate areas linked by little but religion?
▶ Was Pakistan to be secular or an Islamic state?
▶ The refugee crisis of Muslims and the brain drain as Hindus
and Sikhs fled Pakistan for India?
The Challenges of Independence: 1947-1958
The Challenges of Independence: 1947-1958

▶ Communal Riots caused by antipathy toward each other.

▶ Regional Challenges
▶ Khan of Kalat, Ahmad Yar Khan, declared Baluchistan an
independent state. He declared independent on 5 August
1947; compelled to accede to Pakistan on 30 March 1948
▶ NWFP leadership encouraged followers to ignore the edicts of
Pakistan’s new rules.
▶ State language movement (the reason of schism between East
and West Pakistan).
▶ Indus water crisis: Pakistan’s water supply was disrupted by
East Punjab in India.
▶ Princely states: historically independent states had to choose
themself which nation they would join.
Laying the Foundations: The Kashmir Crisis

▶ Amongst the Princely states, Kashmir was also the one.

▶ Maharaja Hari Singh ruled a Muslim majority of some 78%.
▶ Lord Mount Baton urged Maharaja to join one nation.
▶ However, Maharaja sought standstill agreement with both
Pakistan and India, which India refused.
Laying the Foundations: The Kashmir Crisis

▶ Hindu troops opened fire on local Muslims’ demonstration

that they staged to raise their voice to become part of
Pakistan.
▶ This caused a revolt in Poonch, which declared it self as Azad
Kashmir.
▶ India helped Maharaja on the condition that the maharaja
accede to having Kashmir join India.
▶ On October 26 the maharaja chose to join India.
▶ Pakistan asked the United Nations (UN) Security Council to
broker a cease-fire, so that a referendum or plebiscite could be
held among Kashmiris, the results of which would determine
which state they would join.
Laying the Foundations: Economic Challenges

▶ Pakistan didn’t have any industrial plans.

▶ A total of 14,677 factories were registered in the subcontinent
at the time of partition, but only 1,414 were in Pakistan.
▶ Of 394 textile mills, 14 were in Pakistan. There were 106 mills
to process jute, a major crop; none of the mills were in
Pakistan.
▶ Hindus owned the most of the banks and financial institutions.
Laying the Foundations: Economic Challenges

▶ Pakistan also had little cash on hand. Cash assets belonging

to the subcontinent were to be divided, but the division of
assets favored India.
▶ India also held up transferring military equipment that was
due Pakistan.
▶ British general Claude Auchinleck (1884–1981), in charge of
the transition to partition, also favoured India.
Laying the Foundations of Economy: 1947-1958

▶ Pakistan was predominantly agrarian and undeveloped

▶ The main objective of Pakistan at that time was to survive
under adverse international conditions and precarious
domestic conditions.
▶ The war between North Korea and South Korea broke in 1950,
which provided Pakistan a chance to improve its exports.
▶ Pakistan fulfilled the demand of wheat, cotton and jute.
Pakistan’s GDP grewe at 9.4% during this period.
▶ The mercantile class played very important role in attaining
the windfall gains after the Korean War.
Ayub Khan’s Rule: 1958-1968
The Decade of Development: 1958-1968

Ref: Special report: The Changing of the Guard 1958-1969

▶ Often known as the ‘Decade of Development’.
▶ Pakistan’s first military dictator laid the foundations of a
capitalist economy under military rule.
▶ This resulted in numerous economic and social contradictions.
▶ For instance, Ayub Khan’s rule created the social and
economic conditions leading to the separation of East
Pakistan, and to the rise of Zulfikar Ali Bhutto’s awami
inqilaab.
The Decade of Development: 1958-1968 (Achievements)

Ref: Special report: The Changing of the Guard 1958-1969

▶ The Muslim Family Laws Ordinance of 1961. A law that
provided protection to the women.
▶ Pakistan’s family planning laws
▶ Economic growth in Pakistan during much of the 1960s was
stellar, and on Jan 18, 1965, the New York Times wrote that
“Pakistan may be on its way towards an economic milestone
that so far has been reached by only one other populous
country, the United States”.
The Decade of Development: 1958-1968 (Achievements)

Ref: Special report: The Changing of the Guard 1958-1969

▶ Large scale land reforms undertaken in 1959 and the Green
Revolution in agriculture in central Punjab provided high
growth both in agriculture and industry.
Criticism over the policies during 1958-1968

▶ The controversy surrounds the eventual effects and results of

the phenomenal growth rate.
▶ Observers have pointed out that the policies during 1960s
caused rise in income disparity in income across different
regions.
▶ Industrial and agricultural sector grew in central Punjab and
industry grew only in Karachi.
▶ Few business empires got the major benefit of growth.
▶ The concentration of growth in few cities gave rise to social
problems and disparities among classes.
Criticism over the policies during 1958-1968

▶ The capitalism introduced in Ayub Khan’s period was not in

the form as we observe today. It was kind of directed
capitalism where there was high involvement of bureaucracy.
▶ Trade was highly controlled and exchange rate was highly
overvalued.
The Bhutto Years, 1971-77
The Bhutto Years, 1971-77

Ref: Economic and political legacy of Z.A. Bhutto

▶ Zulfiqar Ali Bhutto and the Pakistan People’s Party promised
to bring fundamental changes to the country.
▶ The philosophy of the party he led was democratic socialism
(establishment of an egalitarian society).
▶ His party won elections in the western wing of Pakistan.
▶ Mr Bhutto introduced nationalisation in his period in three
different stages.
The Bhutto Years, 1971-77

Ref: Economic and political legacy of Z.A. Bhutto

▶ The economy grew by more than 5% during that time
▶ Bhutto aroused political consciousness among the masses.
▶ Bhutto initiated nuclear program.
▶ Bhutto also limited Pakistan’s relationship with US, after its
role in 1971 war and turned towards the brother Muslim
countries.
The Bhutto Years, 1971-77 (The Dark Sides)

Ref: Economic and political legacy of Z.A. Bhutto

▶ The nationalization brought huge downturn in the growth
rate, economic inefficiency and increased misallocation of
resources.
▶ Due to the lust for power, he turned democracy into
authoritarianism.
▶ He brought amendments to the 1973 constitution by force of
brute majority.
▶ Attempted to encroach upon provincial autonomy guaranteed
in the constitution,
The Bhutto Years, 1971-77 (The Dark Sides)

Ref: Economic and political legacy of Z.A. Bhutto

▶ Manhandled opposition leaders both inside and outside
parliament, and
▶ Humiliated and punished his own partymen who raised their
voices against his will.
▶ Created federal security force (FSF) to harass and victimise
the opposition.
Bhutto’s Economic Mismanagement1

▶ Bhutto’s policies were wrought with mismanagement,

confusion and bad luck.
▶ He failed miserably in providing roti, kapra, and makaan
▶ There were two major crop failures in Bhutto’s short span of
five years with disastrous consequences for the economy, in
particular the textile industry.
▶ He devalued the Pakistani rupee in order to increase exports,
but the four-fold in- crease in OPEC oil prices dealt a severe
blow to the economy which imported nearly all its petroleum
products and fertiliser.

1
Ali, B. (1987). Pakistan’s Decade of the Generals. Economic and Political
Weekly, 1123-1127
Bhutto’s Economic Mismanagement

▶ Workers took to the streets and had plans to take over various
industrial units before they were massacred by the awami
police and military;
▶ The industrialists fled the country with their millions;
▶ Western aid agencies and banks were unwilling to come
forward to make loans;
▶ West Pakistan lost a huge share of foreign income that was
coming to them due to the production of tea, jute and paper
in the East Pakistan.
The Second Military Government 1977-88
The Second Military Government 1977-88

▶ General Zia’s regime was more liberal in economic terms.

▶ Higher industrial growth.
▶ Favourable help from U.S. after Soviet invasion of
Afghanistan caused positive effect.
▶ Remittances from the Middle East and aid from abroad
helped launch Pakistan’s second economic revolution, where
the middle class emerged.
▶ Second economic revolution because of remittances from the
Middle East and aid from abroad
▶ Emergence of middle class
The Second Military Government 1977-88: Failures

▶ Martial rule inflicted deep rooted damage to Pakistani society

▶ Drugs and arms culture in Pakistan
▶ Ethnic tensions increased especially in Karachi due to the
formation of Muhajir Qoumi Movement
▶ Underutilization of resources (foreign aid and remittances)
Pakistan’s Decade of the Generals

Ref: Ali, B. (1987). Pakistan’s Decade of the Generals. Economic and Political
Weekly, 1123-1127
▶ After ousting Prime Minister Zulfiqar Ali Bhutto on July 5,
1977 General Zia-ul-Haq promised to hold elections within 90
days.
▶ During his term, he never fulfilled the promise of holding
elections.
Pakistan’s Decade of the Generals

Ref: Ali, B. (1987). Pakistan’s Decade of the Generals. Economic and Political
Weekly, 1123-1127
▶ During early years between 1977-1979, the business
community waited for ’stability’ to return to the economy.
▶ Once businessmen were certain, a large amount of the money
that had fled returned and there was an investment boom.
▶ Draconian measures were passed without much resistance.
▶ Strict rules for the trade unions made it easier for
industrialists to get higher return.
Pakistan’s Decade of the Generals

Ref: Ali, B. (1987). Pakistan’s Decade of the Generals. Economic and Political
Weekly, 1123-1127
▶ Along with the aid of $ 3.2 billion in 1980 from the United
States, the Islamic countries (notably Saudi Arabia) poured in
by the bucketful.
▶ This money has filled the pockets of thousands of military and
bureaucratic officials.
▶ The country’s outstanding debt reached $ 14 billion.
Return of Democracy: 1988-1998
Return of Democracy: 1988-1998

▶ Return of democracy following the death of General Zia’s

death.
▶ Four elections held between 1988-1997.
▶ Era of structural adjustment rather than era of democracy as
the policies decided the course of action for Pakistan.
▶ Economic liberalization and stabilization
▶ Privatization
▶ Reduction in tariff rates to increase exports
The Condition of Pakistan’s Economy During 1990s

Ref: Pakistan’s lost decade of the 1990s

▶ In the 1990s,
▶ economic growth plummeted to between 3% and 4%,
▶ poverty rose to 33%,
▶ inflation was in double digits and
▶ the foreign debt mounted to nearly the entire GDP of Pakistan
as the governments of Benazir Bhutto (PPP) and Nawaz
Sharif (PML) played musical chairs.
The Condition of Pakistan’s Economy During 1990s

Ref: Pakistan’s Economic History 101

▶ In 1999 Pakistan’s total public debt as percentage of GDP
was the highest in South Asia (99.3 percent) of its GDP and
629 percent of its revenue receipts, compared to Sri Lanka
(91.1% & 528.3% respectively in 1998) and India (47.2% &
384.9% respectively in 1998).
▶ Internal Debt of Pakistan in 1999 was 45.6 per cent of GDP
and 289.1 per cent of its revenue receipts, as compared to Sri
Lanka (45.7% & 264.8% respectively in 1998) and India
(44.0% & 358.4% respectively in 1998).
The Structural Adjustment Program (SAP): Definition

▶ Loans by the IMF and the WB.

▶ The borrowing countries are required to implement certain
policies in order to obtain new loans (or to lower interest rates
on existing ones).
▶ The conditionality clauses attached to the loans have been
criticized because of their effects on the social sector.
The Structural Adjustment Program (SAP)

▶ Countries suffer deficits in the balance of payments, budget

deficits, inflation, etc.
▶ To fix these kinds of problems, these countries receive grants
and concessional loans.
▶ Starting from 1980, (IFIs) International Financial Institutions
such as the International Monetary Fund (IMF) and World
Bank started to consider interventions in these economies and
tied their foreign aid to certain structural reforms. .
The Structural Adjustment Program (SAP)

▶ The SAP supported program focused on four essential areas,

(i) raising price incentives for agricultural producers,
(ii) increasing domestic savings,
(iii) easing bottleneck on supply and fiscal management, and
(iv) liberalizing exchange and trade system.
The Structural Adjustment Program (SAP)

There were four policy instruments of SAP:

▶ Reduction in budget deficit to 4% of GDP,
▶ Increase in indirect taxes,
▶ Adjusting the exchange rate and
▶ Reduction of subsidies
The Consequences of Structural Adjustment Program
(SAP)

The controversial policies of SAP resulted in:

▶ A serious economic crisis at the macroeconomics and
individual level.
▶ Inflation rate increased due to higher taxes, rise in
administrative prices, and the free fall of Pakistani rupee.
▶ Trade reforms caused de-industrialization of Pakistani
industries.
Why the Policies of IMF and World Failed?

Top reasons for the failure of the IMF and World banks policies are
as follows:
1. The IMF has created an immoral system of modern day
colonialism that SAPs the poor
2. The IMF serves wealthy countries and Wall Street
3. The IMF is imposing a fundamentally flawed development
model
4. The IMF is a secretive institution with no accountability
Musharraf’s Era
Musharraf’s Era

▶ Musharraf’s era started on October 12, 1999 and ended on 18

August 2008.
▶ General Musharraf ousted Nawaz Sharif’s government.
▶ Imposed Martial Law, which is treason and violation of Article
6 of 1973 Constitution of Pakistan.
Musharraf’s Agenda

In the beginning, he gave 7 point agenda:

▶ Rebuild national confidence and morale.
▶ Strengthen the federation, remove inter-provincial disharmony
and restore national cohesion.
▶ Revive the economy and restore investor confidence.
▶ Ensure law and order and dispense speedy justice.
▶ Depoliticise state institutions.
▶ Devolution of power to the grass-roots level.
▶ Ensure swift and across the board accountability.”
Musharraf’s Era: Economic Difficulties

▶ New US sanctions after the coup had, in fact, increased

problems for the military regime.
▶ Pakistan had also been suspended from the Commonwealth in
the wake of the coup.
▶ Fortuitously, the situation changed completely after 9/11
when Pakistan entered into a new alliance with the US for the
so-called ‘war on terror’.
Musharraf’s Era: Economic Difficulties

▶ the economic aid and concessions from the US and other

Western countries to Pakistan increased considerably.
▶ These included a $1 billion loan write-off, $600 million in
budgetary support and debt rescheduling.
▶ $12.5 billion debt rescheduling was not only far larger than
any in the past, but the terms of the agreement were also
much more favourable.
▶ The World Bank, the IMF and numerous other donors were
back to help out Pakistan. Even USAID, which had pulled out
almost a decade ago after the US had enforced nuclear-related
sanctions in 1990, returned to Pakistan.
Musharraf’s Era: Major Reforms and Achievements

▶ Nine world class engineering universities were developed.

▶ Literacy rate in Pakistan increased from 45% (in 2002) to 53%
(in 2005). Allocation to education increased to 4% of GDP
▶ Many students were sent for higher education to different
countries.
▶ Major Industrial estates developed under Musharraf’s vision:
M3 industrial, Sundar industrial estate, Chakri industrial, etc.
Musharraf’s Era: Major Reforms and Achievements

▶ According to the Economic Survey 2005, poverty in Pakistan

in 2001 was 34.46%. And after 7-8 years of Musharraf,
poverty in 2005 was 23.9%. Thus, poverty decreased by 10.56
percentage points.
▶ The Compressed Natural Gas (CNG) sector of Pakistan
attracted over Rs 70 billion investments during the five years
(2001-2006) as a result of liberal and encouraging policies of
the government.
▶ Five dams were built: Mirani, Subakzai, Gomalzam, Khurram
and Tangi.
▶ The GDP per Capita in 2007 reached to $1000.
Musharraf’s Era

▶ Pakistan became one of the four fastest growing economies in

the Asian region during 2000-07 with its growth averaging 7.0
per cent per year for most of this period.
▶ Pakistan succeeded in reducing poverty by one-half, creating
almost 13 million jobs, halving the country’s debt burden,
raising foreign exchange reserves to a comfortable position
and propping the country’s exchange rate, restoring investors’
confidence and most importantly, taking Pakistan out of the
IMF Program.
Musharraf’s Era: The Shadows of War on Terrorism

▶ The decade also cast a huge shadow of the US ”war on

terror” on Pakistan, eventually turning the nation into a
frontline state in the increasingly deadly conflict that shows
no signs of abating.
▶ Pakistan according to one estimate has spent around $ 102
billion, which could be used for so many other productive
purposes and for alleviating the evils affecting the Pakistan’s
economy.
Zardari’s Government: “Love him or hate him, one can
never underestimate President Zardari,”
Zardari’s Government

Ref: Making History in Pakistan Simply by Serving a Full Term

▶ Asif Ali Zardari, Benazir Bhutto’s widower, was elected
president on Sept. 6, 2008, with the support of the PPP and
in coalition with other secular parties, until it collapsed in
January 2011.
▶ Over his five years in power, Mr. Zardari fended off threat
after threat. Senior judges sought to unseat him through
corruption prosecutions. Generals murmured to diplomats
about the possibility of a coup. The Taliban vowed to kill
him. And large portions of the Pakistani news media and
public seemed to revel in ridiculing or condemning him.
Zardari’s Government: Achievements

▶ Restoration of the Chief Justice and Deposed Judges

▶ Agreement on 7th National Finance Commission (NFC) Award
▶ Passage of the 18th Amendment to the Constitution
▶ Continuity of Economic Policies of Musharraf
Zardari’s Government: Failures

▶ PPP’s government despite its achievement caused huge losses

to Pakistan’s economy.
▶ Mismanagement
▶ Negligence on the issues of national importance.
▶ Reconciliatory behaviour of PPP leadership to keep its rule
intact gave extra political benefits to its coalition partners
MQM, ANP, and PML-Q which caused huge loss to Pakistan.
Nawaz Sharif’s Government 2013
PMLN’s Government 2013-2018 (Wikipedia)

▶ In 2013, Nawaz Sharif returned to inherit an economy crippled

by energy shortages, hyperinflation, mild economic growth,
high debt, and a large budget deficit.
▶ Shortly after taking office, Pakistan ”embarked on a $6.3
billion IMF Extended Fund Facility, which focused on reducing
energy shortages, stabilizing public finances, increasing
revenue collection, and improving its balance of payments
position.”
▶ Lower oil prices, better security, higher remittances, and
consumer spending spurred growth toward a seven-year high
of 4.3 percent in the fiscal year 2014-15
PMLN’s Government 2013-2018

The Nation: PML-N rule: A story of Gains and Pains

▶ The PML-N manifesto had set a total of 89 targets for various
sectors. But only six of them it could achieve during its term.
▶ They achieved good performance in energy sector, law and
order,employment, inflation, women and youth empowerment.
▶ The projects like China-Pakistan Economic Corridor (CPEC),
Lahore Metro Bus and Orange Line were initiated with the
Chinese loan.
PMLN’s Government 2013-2018: Failures

▶ The government did not touch that part of the manifesto

which had promised the establishment of a commission for
paving way for the creation of Bahawalpur, South Punjab and
Hazara provinces.
▶ Pakistan Steel could not fulfill the promise to revamp
Pakistan Steel Mills and Pakistan International Airlines (PIA),
the two major state institutions that are in a deep crisis for a
variety of reasons.
▶ Balance of payments concerns have also reemerged as a result
of a significant increase in imports and weak export and
remittance growth.
PMLN’s Government 2013-2018: Failures

▶ Negative trade balance, widening current account deficit, low

savings and investments continued to be key challenges to
sustainable economic development throughout the PML-N
tenure.
▶ The addition of $42billion foreign loans, which increased the
total debt burden on the national economy to $ 90 billion,
record unfavourable balance of trade was another failure of
the PMLN government
▶ Average growth in the agriculture sector remained 2.1 percent
against the target of 3.5 percent although the government
had announced a hefty Rs 341 billion relief package for the
farmers.
PMLN’s Government 2013-2018: Failures

▶ The average industrial output stood at 5.1 percent as against

the targeted 6.3 percent.
▶ The large-scale manufacturing grew at an average pace of 4.3
percent against the target of 6 percent.
▶ Similarly, the services sector grew at an average pace of 5
percent against the set target of 5.8 percent.
▶ The ease of doing business indicator could not be improved
and social service delivery remained poor contrary to the
claims made in the PML-N manifesto.
Imran Khan’s Government 2018
PTI’s Government’s Manifesto

▶ Transformation of governance practices.

▶ Strengthening of Federation
▶ Inclusive economic growth
▶ Uplift of agriculture, build dams and conserve water
▶ Revolutionize social services
▶ Ensure Pakistan’s national security
PTI’s Government’s Prmoises

▶ 10 million jobs
▶ 5 million houses
▶ Boost the tourism industry
▶ China Pakistan Economic Corridor Engagement
▶ Fix Pakistan’s energy challenge
▶ Reform FBR
Challenges to the PTI’s Government

▶ Macroeconomic Stability (Deficits, Inflation & Interest rate)

▶ Revival of Manufacturing & Exports Growth
▶ Structural Reforms
▶ Political Stability
▶ Geopolitics
Performance of the PTI’s Government

▶ Increase in Inflation, particularly its pace could be very

detrimental as it will lead to further increase in Interest rates
as well as Fiscal deficit.
▶ Current account deficit surpassed $9 billion in the first half of
the ongoing fiscal year, accounting for 5.7 per cent of the
gross domestic product, the State Bank of Pakistan (SBP)
data revealed on January 22, 2022.
▶ This is already well a head of the target of 4% of GDP.
▶ So far due to pandemic and other international constraints,
Imran Khan’s government has not been able to meet its key
targets of jobs, housing, etc.
Performance of the PTI’s Government: Challenges

▶ A fragile economy.
▶ Political and economic situation in Afghanistan.
▶ Rising pandemic fears
▶ Decrease in LSM, FDI, stagnation in Exports are quite
alarming
▶ Extra ordinary pressures of IMF and FATF